Money: Beginner's guide to investing in shares: Banks may lose their shine

The sector is riding high on takeover fever, but for how long, asks Magnus Grimond

LAST year's unseemly rush by the Halifax and five other big mutually owned financial groups to the stock market did more in one year for private share ownership than state privatisations managed in 13. If you are a small investor, you are more likely to own a bit of a building society- turned-bank such as the Halifax than any other company on the stock market. Figures from ProShare, the lobby group, show that the conversion of the former mutuals, which included Alliance & Leicester, Woolwich and Bristol & West building societies, has turned 7.5 million or more savers or policyholders into shareholders as well.

If you are one of these, you have probably been bewildered by the varying fortunes of the newly floated societies. Shares in the Halifax and Woolwich have meandered only a little from their launch price, but those ofNorthern Rock and Alliance & Leicester have soared by as much as 50 per cent.

Much of this starkly differing performance is down to takeover fever sweeping the bank sector. The restraint of Halifax shares has been partly due to the feeling that the mortgage giant is too large to be swallowed, while Woolwich is expected to use its statutory five-year protection from takeover bids to fend off unwelcome offers. By contrast, Northern Rock and Alliance & Leicester, each for different reasons, are seen as takeover targets.

But it is very unwise for long-term investors to hold shares solely on the hope that a bidder will pay an outrageous price for them. These shares have already come a long way: those of the Woolwich started their market life at double the level of official estimates just 18 months before, while, as forecasts from City stockbrokers Merrill Lynch show, Northern Rock's now stand on a heady price-earnings (p/e) ratio of 21, a least a fifth higher than the stock market as a whole.

The current glamour of banks reflects a fashionability to which the sector is not accustomed. Ten years ago, bank shares languished on p/e multiples of half those of the rest of the market, while their dividends yielded income as much as 50 per cent above the average. But in the last six years, banks have outperformed other shares by around 150 per cent.

This is mainly due to two real, or "fundamental", changes to the way banks operate. First, many people believe that for the first time in a generation the British economy is being better managed, with a determination to keep inflation low and avoid the boom-and-bust cycle. These economic cycles have always caught out the banks, which have notproved very good at their main business of lending money. The assumption now is that, if businesses and individuals making up the economy operate on a more even keel, bank loans to them should be of better quality than in the past.

The second factor boosting the sector is better management of the banks themselves. The discredited old guard that ran the industry in the 1980s has largely been replaced. Management has been weeding out loss-making lines, even at the expense of a few sacred cows. Barclays and NatWest have dumped much of their expensively created but poorly performing investment banking. Another "core" business scaled back in the face of wafer-thin margins is lending to big companies, which can often borrow from the money markets more cheaply. Costs have been cut relentlessly and surplus funds given back to shareholders as higher dividends or share buy-backs, not pumped into the economy as loans to flaky borrowers.

The arrival last year of the building societies and the general urge to merge have come on top of all this. The former mutuals have had a dramatic effect on the market indices. Over the past year, the weighting of banks in the main FT-SE 100 index has grown by a third: they now represent a fifth of the measure. The fund managers who slavishly follow the index have had to scramble for shares in the former building societies or older banks to maintain their weighting, pushing up share prices.

Can this last? Many analysts are bubbling with enthusiasm on takeover hopes, but these may be overdone. Politics is likely to scupper the much- rumoured merger of Barclays and NatWest, given the huge share of the English market the combined bank would control. Straight takeovers would require heroic assumptions about the UK market's prospects to justify paying current stock market prices.

But predicting takeovers is only for the brave. Bank shares are now generally on a p/e rating at or above the market for the first time in years, while bad debts have fallen to historically low levels. That leaves little room for mistakes if economic conditions become more turbulent. HSBC and Standard Chartered, with big operations in the Far East, have already seen their previous heady ratings cut down to size. With the UK economy set for a downturn in 1998, the sector may prove duller than some wilder spirits imagine.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Hard labour: a woman bears the load in a factory. But equal treatment is causing pension problems

Women to lose benefits from contracted-out pension scheme

Workers were promised that the state would pay inflation increases on parts of their pensions. But now the DWP disagrees
The Budget, says one critic, should have done more to encourage construction of affordable homes

Help for buyers but where are the homes?

A vote-winning Budget promised less tax, greater savings flexibility, and government handouts for first-time housebuyers
'It will be no wonder if people lack the enthusiasm to save taxfree,' says one expert. But there are ways to beat low rates on cash Isas

How to make the most of Isas: You can save more money now, the returns are tax-free and the rules are flexible

Rob Griffin sees how you can surmount the one big obstacle

Growing number of women under the age of 35 are turning to online gambling

Online gaming is changing the profile of victims, who see it as an answer to difficult relationships but sink deeper into trouble

Ethical investments: Lack of awareness means investors are supporting industries they oppose

Many of us have good intentions now but either we don't switch accounts or we back 'nasty' activities without realising
Payday lenders fail to recognise customers in financial difficulty, the FCA said

Payday lenders accused of unfair practices by watchdog

The Financial Conduct Authority found non-compliance in all reviewed firms

Hooray, you're going to live longer! But what should you do to celebrate?

Pension expert John Lawson talks on why improved longevity is something to plan for carefully

Pension freedom: Steve Webb answers your questions on the big shake-up

The new freedoms arrive in April but many of you have told us that you see problems as well as opportunities. The pensions minister Steve Webb responds
Pension Minister Steve Webb

There are 'dark corners' of the investment and pensions industry, says Pensions Minister

The DWP and the FCA have joined forces to investigate transaction charges in occupational pension schemes

Scottish Power was found to have unacceptably long call waiting times

Scottish Power hit with sales ban by regulator

The company was found to have unacceptably long call waiting times

This phoenix rose from the stage at the London Olympics. The insurer grew out of zombie life insurance funds

Phoenix Life: Chance of a refund for overcharged policyholders has risen

A retired adviser got his money back from the insurer after claiming he had been overcharged. Thousands of others may have a strong case
Expect a new wave of fishing expeditions by fraudsters now we can invest our life savings

Cold callers and your pension: watch out for dangerous boiler room scams

Sean O'Grady received a cold call last week that was much more sinister than normal. Yes, someone wants to get their hands on his pension...

Fuel poverty could claim 100,000 lives over next 15 years, warns energy charity

The NHS is currently bearing a yearly burden of approximately £1.5bn treating cold-related illnesses every winter

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Trainee Consultant - Surrey / South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Ashdown Group: Trainee Consultant - Surrey/ South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Recruitment Genius: Client Services Assistant

    £18000 - £20000 per annum: Recruitment Genius: A Client Services Assistant is ...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Day In a Page

    No postcode? No vote

    Floating voters

    How living on a houseboat meant I didn't officially 'exist'
    Louis Theroux's affable Englishman routine begins to wear thin

    By Reason of Insanity

    Louis Theroux's affable Englishman routine begins to wear thin
    Power dressing is back – but no shoulderpads!

    Power dressing is back

    But banish all thoughts of Eighties shoulderpads
    Spanish stone-age cave paintings 'under threat' after being re-opened to the public

    Spanish stone-age cave paintings in Altamira 'under threat'

    Caves were re-opened to the public
    'I was the bookies’ favourite to be first to leave the Cabinet'

    Vince Cable interview

    'I was the bookies’ favourite to be first to leave the Cabinet'
    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor